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LIBOR cessation: demystifying the switch to risk-free rates

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This article was written by Dale Rayner and Jenny Zhao, with thanks to Alix Prentice, Richard Mazzochi, Jessie Chong and Helena Busljeta for their research and contributions.

It's official.

On 5 March 2021 the UK Financial Conduct Authority (FCA) announced[1] that all LIBOR settings will either cease to be published by any administrator or will no longer be representative at specified future dates, with a clear message to market participants: "act now and complete your transition by the end of 2021."  See our recommended "dates to diarise" below.

Market participants should consider whether FCA's latest announcement constitutes a pre-cessation or cessation trigger under their LIBOR-linked contracts.  Where parties have incorporated Asia Pacific Loan Market Association (APLMA) or Loan Market Association (LMA) rate switch language in their contracts, the FCA announcement will likely (though not in all cases) constitute a "Rate Switch Trigger Event" for a rate switch currency.  This means that the rate will switch to an RFR on the date on which the relevant LIBOR rate for the quoted tenor ceases to be published or otherwise becomes unavailable (or on any earlier date specified in the documents).  Agents for syndicated lenders should be aware that certain notification obligations may have already been triggered under the contracts they manage.

The International Swaps & Derivatives Association (ISDA) has also confirmed[2] that the FCA announcement is an index cessation event under the LIBOR 2020 IBOR Fallbacks Protocol (the "Protocol").  As a result, the FCA announcement has locked in Bloomberg's fallback spread calculations for all Sterling, USD, Euro, Swiss Franc and JPY LIBOR settings.  For clients who already adhere to the Protocol, their ISDA contracts will transition automatically to replacement rates when LIBOR ends. 

With the clock now ticking louder towards the end of LIBOR, even the most reluctant observers are now aware that the question is no longer 'whether' or 'when', but 'how' to manage the transition.

In this digest, we provide an overview of what benchmark reform is, why this matters and what you should be doing to prepare your business. 

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LIBOR cessation
In this digest, we provide an overview of what benchmark reform is, why this matters and what you should be doing to prepare your business.

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